Pensions and Retirement

Retiring can be a minefield. Firstly you need to think what you want to do!

There are several options available to help you enjoy your retirement to the full. Here we consider three of these possibilities.

Annuities

One option is to buy a traditional annuity. An annuity is the insurance contract you have to buy if you retire with a personal pension or money-purchase company pension. By buying an annuity you are exchanging your pension fund for an income for the rest of your life.

An annuity can also provide a pension for you wife or husband, increasing each year or just remaining level in payment.

The income from a standard annuity is based on the interest rates in force on the day when you buy the annuity. This is because annuities use gilts (fixed interest Government stock) to provide the retirement income. As a result, annuity rates are generally high when interest rates are high. However, if interest rates are low, the yield from gilts is reduced and the income from a standard annuity will be less.

For the more adventurous individual, an alternative is to buy an investment annuity where you still get an income but your pension fund remains invested. The income from the annuity then fluctuates, depending on the how the underlying fund is performing.

Pension Drawdown

If you are aged between 50 and 75, you may wish to consider pension drawdown (also known as pension fund withdrawal). Pension drawdown allows you to take your tax-free cash and get income from your pension fund without having to buy an annuity. This really can be a chance to have you cake and eat it, and can be particularly beneficial if you retire when annuity rates are low.

If you opt for pension drawdown, your pension fund remains invested and you allowed to take as much income as you need from your fund subject to certain minimum and maximum limits. You take your tax-free cash at the beginning and the income is paid from you pension fund. When you are ready you can buy an annuity (annuities need to be purchased at age 75).

Benefits of pension drawdown:

Tax-free cash at the outset
Deferral of annuity until age 75
Control over when to purchase an annuity
Income flexibility
Control over your investment
An extra chance of investment growth

What income can I expect?
The income you can get depends on the size of your pension fund and how old you are. The table below assumes a pension fund of £250,000.

Age	Male	Female
55	£16,999 max £5,950 min	£15,499 max £5,425 min
55	£18,999 max £6,650 min	£16,999 max £5,950 min
55	£21,750 max £7,612 min	£19,249 max £6.737 min

Why use pension drawdown?
As you fund remains invested in the stock market the value of your fund can go down as well as up. As long as you understand the risks and feel comfortable with them, there are lots of reasons to choose pension drawdown:

You need flexibility in the size of your pension income - for example if you are self-employed and wish to retire gradually
You want to leave the majority of your pension fund to your heirs
You are confident that your fund will grow more and you will get a better return

Phased Retirement

You should not confuse phased retirement (PR) with pension drawdown/pension fund withdrawal, although the effects of each are not dissimilar.

If you have a money purchase scheme that allows for segmentation, this means that the scheme is, in fact, lots of little schemes rolled into one. Each segment of the scheme is its own discrete pension, and you can take the benefits from each of them when you like, between the ages of 50 and 75. So you could, perhaps, take one bit of your pension every month from the age of 55 to 60. In this way, you gradually phase in your retirement benefits.

You can use phased retirement in conjunction with pension drawdown, which could be particularly useful if you are self-employed or, indeed, if you plan to wind down your workload (and income) gradually over several years.

For more information on choosing the most suitable retirement solution for your individual situation, please click here.